The
idea that someday we are going to "run out of oil"
is an old one. In fact, it goes back to the beginning of the 20th Century.
However, it is a mistaken idea.

A reservoir of crude oil is never "pumped dry".
Instead at some point, the extraction of hydrocarbons from a well is stopped
and the well capped, because it is no longer economic to keep producing
from it. At this point, most of the oil which the reservoir once contained
is usually still in the ground. The same applies to natural gas and to
reservoirs which contain both gas and oil.

Nevertheless, this mistaken idea has its roots in a geological
reality. Oil production from any well, reservoir or field of multiple
reservoirs will increase from an initial volume, eventually peak and then
decline irreversibly to its "capping point". The decline may
start immediately or some years later, after production has "plateaued"
for a while.

When plotted on a graph, every production curve resembles
a hill. The precise shape of the hill is largely determined by economics,
the rocks which contain the oil and the history of its extraction. But
is always a hill. Once you pass the peak, you cannot reverse the decline
for very long, if at all. If you want more oil, you will just have to
drill another well, preferably in another reservoir some place else.

So when we say that world crude-oil production is going
to peak, we do not mean that one day there will be no oil left in the
ground, or that all the wells are going to be capped on the same day.
We mean that at some point, the oil which is economic to extract (by whatever
means) will reach its all-time high, and that sooner rather than later,
there will be less and less of it produced each year thereafter.

So the more important question is not how much oil is
down below, but how fast one can get it out. If you try to accelerate
the extraction process too much, because near money is worth more than
far money, you run the risk of reducing the amount of oil and/or gas which
can be extracted over the remaining life of the well or reservoir. The
foregoing is not a theory. It is economics, engineering and geology all
entwined together.

From a theoretical debate to an alarm about actual
reserves

The optimum pattern of extraction for any well or reservoir
depends primarily on certain factors, such as the size of the initial
find, the rate of extraction over time, the characteristics of the rocks
in which the reservoir is located and, of course, the economics of further
extraction. So many professionals have attempted to model this pattern
mathematically.

One of the most famous models was M. King Hubbert's version
of the logistic curve, by which he correctly predicted the peak and decline
of US crude production. In fact, most of the debates over "peak oil"
in the 20th Century revolved around what are, for lay people, arcane issues
of modeling. So in that sense, and that sense only, the 20th Century debates
may be characterized as "theoretical" in part.

However, the debate which has begun in the 21st Century
is different. It is not theoretical. It is not even about forecasting
techniques. It got started because people began to question the veracity
of Saudi Arabian oil statistics and the accuracy of that country's projections
of its future production. This is the story.

For some five decades, Saudi Arabia managed to make the
world believe that it was a cornucopia of oil. It also managed to convince
people that it had some "aces up its sleeve", in the form of
geologically promising rock formations which had not been drilled. The
writer remembers this very clearly, beginning in his refinery days, in
the late 1960's.

Indeed up to a few years ago, Saudi oil executives were
still claiming that the country would produce 10, 15 or even 25 million
barrels per day of crude oil for the next 50 years! This was despite the
fact that it had never produced much more than 10 million and is currently
producing less than eight million. All of these allegations were of course
very convenient because (a) they got the world "hooked" on cheap
oil and (b) they assured the country of US military protection against
hostile neighbors, who were stronger militarily and, in some cases, more
populous (Iraq, Iran and Israel).

However, all of these assertions have turned out to be
somewhat optimistic. Most of the reservoirs which are still active today
"show their age", especially those which have been producing
for 50 years or more, and some even began to do so decades ago. Last but
not least, the unexplored or underdeveloped reservoirs appear to be only
"jacks" or "tens", instead of "aces". Only
the outside world didn't know any of this until recently.

The first person to "blow the whistle" was Dr.
Sadad al Husseini, head of exploration and production for Saudi Aramco,
the government oil company. In 2004, he wrote a memorandum to the Minister
of Oil. Following a dead silence (at least as far as the public was concerned),
Dr. Husseni retired.

However, Matthew Simmons, an American banker with 35 years
of oil-industry experience, picked up the thread. Among other documents,
he studied nearly 300 Saudi technical presentations given at international
conferences with the approval of Saudi Aramco. He concluded that Husseini
was right and wrote the now famous book, "Twilight
in the Desert" (2005) which sets forth his findings. This book
does not confirm the Saudi joke, "camel herders to camel herders
in three generations", but still it tells a pretty somber story.

Needless to say, lots of people heard or read each and
every one of these presentations but very few heard or read more than
a few. So most people were not aware of the story which these documents
told, when organized by reservoir and set end to end by date.

This book set off an international debate with various
consequences. First of all, the Saudis are now talking about a peak in
their production of 12 million barrels, to be followed by a "plateau"
of 10 million barrels and then a decline. The plateau is expected to last
no more than a decade. All of which begs the question: When Saudi production
peaks, can a world peak be far behind?

Secondly, the King of that country reserved all futures
discoveries "for our grandchildren", instead of allowing them
to be exploited immediately, to satisfy the world's insatiable appetite
for crude oil. Thirdly, everybody began to make projections of the year
in which world crude-oil production would peak.

Unfortunatelythese
projections vary "all over the map". For example, "the
optimists" like ExxonMobil, who want to keep us hooked on oil until
the last possible moment, say 2030 or 2032.

"The pessimists" claim that the peak has already
occurred, say in 2004. More important however, the International Energy
Agency, once a leading optimist, has just "thrown in the towel"
and gone for 2020. Elsewhere, a consensus seems to be building around
2010-2013.

In part, the reason for these disagreements is this. It
is hard to project future economic conditions and future technological
breakthroughs. What kind of technologies will we have at our disposal,
what will be their fruits and what will they cost, ten years from now?
What will be the price of crude oil from a given location? So how much
crude oil will it be "economic" to extract at that point?

But the biggest problem is that industry statistics are
full of errors, omissions and bald-faced lies. This is especially true
for estimates of "reserves", that is for estimates of the oil
which remains to be extracted from active reservoirs and promising prospects.
For example, the official reserves of one major producer are reliably
believed to be overstated by 111%, according to a respected industry publication.

Even if industry statistics were accurate (which they
are not) they would still be exaggerated. Neither production nor reserve
statistics deduct the equivalent in crude oil of the energy required to
put a marketable liquid in a tank on the surface. This can vary from 15%
for an old reservoir which requires heavy water injection to 45% for a
worst-case tar sands formation.

Meanwhile most compilers of statistics for the industry
continue to publish inaccurate data (so as not to offend their sources)
and two even ridicule the very concept of peak oil as a mere "theory".

Our guess

Under the circumstances and in the writer's professional
judgment, the best we can say is the following:

There is a 90% chance that world crude-oil production
will reach an all-time peak by or before 2020. There is at least a 60%
chance that the subsequent decline will be steep rather than shallow,
whether or not a plateau follows the peak. A steep decline is expected
to bring on a worldwide depression and, possibly, regional wars over sources
of energy.

Needless to say, if you are a long-term or strategic planner,
2020 is "just around the corner" with climate
change waiting for us.

Unfortunately many of the decision makers who still occupy
important positions in business and government are either "ostriches",
"friends of petroleum" or "all of the above" and don't
take any of the above very seriously.